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### Viewing cable 05RIODEJANEIRO19, Brazil - Bahia State Growing Faster but Interior

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05RIODEJANEIRO19 | 2005-01-04 17:17 | 2011-07-11 00:00 | UNCLASSIFIED | Consulate Rio De Janeiro

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 03 RIO DE JANEIRO 000019

    SIPDIS

    BUENOS AIRES FOR M.HAARSAGAR
    STATE PASS OPIC FOR RGREENBURG, DMORONESE
    STATE PASS EXIM FOR NATALIE WEISS, COCONNER
    STATE PASS USTDA FOR AMCKINNEY
    TREASURY FOR FPARODI

    E.O. 12985: N/A
    TAGS: EINV ECON EFIN BEXP BR
    SUBJECT:  Brazil - Bahia State Growing Faster but Interior
    Still a Problem

    Ref:  2003 Rio de Janeiro 1773

    Summary
    -------

    ¶1.  While the State of Bahia has the sixth largest GDP in
    Brazil and expected growth of 8.6% in 2004, the concentrated
    nature of Bahia's economy - both in terms of geography and
    industry - is a challenge for state authorities.  In
    response, the State has developed several special programs
    designed to attract investment and address issues such as
    poverty and infrastructure bottlenecks.  The most obvious
    success story to date is the Ford plant in Camacari; most
    believe the state-conceded incentives were more than worth
    it for the positive impact on the State's image alone,
    allowing Bahia to attract future investments at a much lower
    cost.  As for the future, several new investments are
    expected to come on-line in 2006 and tourism - while still a
    relatively small part of the state's economy at 4% of GDP -
    is on the rise.  However, while these programs and
    investments may help the coastal region, curing the ills of
    Bahia's interior - and its consequent poverty - will not be
    easy.

    A Concentrated Economy Poses Challenges
    ---------------------------------------

    ¶2.  While the State of Bahia has the sixth largest GDP in
    Brazil (4.7% of the national GDP in 2002) and an estimated
    growth of 8.6% in 2004, the concentrated nature of Bahia's
    economy - both in terms of geography and industry - is a
    challenge to overcome.  The developed coastline relies on a
    few sectors such as petrochemicals and agribusiness;
    cellulose, petrochemicals and the automotive industry
    account for 40% of the State's GDP.  In the far western part
    of the state, the economy resembles that of Brazil's center-
    west - where soy is king - and is doing well; Cargill has a
    presence there and irrigated fruit farming is on the rise.
    However, Bahia's largely semi-arid interior is very poor and
    is sustained primarily by transfer payments from the federal
    and state governments, e.g., retirement payments and
    automatic transfers to municipalities.

    ¶3.  Curing the ills of Bahia's interior will not be easy
    and, according to Bahia's State Development Agency
    (Desenbahia) President Vladson Menezes, there is no
    consensus among state economic authorities on an approach.
    Menezes told Rio econoff that he thinks that the State
    should try to stimulate what little economic activity
    already exists in these places, i.e., fruticulture,
    irrigated crops, cotton and castor oil.  Castor oil could
    take on more importance as Bahia's biodiesel program
    (sponsored by the state and federal government) gets up and
    running (Note:  Bahia is the largest producer of castor in
    Brazil, accounting for 80% of Brazil's national production.)

    Long-Term Development Plans
    ----------------------------

    ¶4.  Bahia's sound financial situation (ref A) and fiscal
    adjustment program have enabled the State to develop several
    programs designed to attract investment.  The first program
    was "Pro-Bahia," which began to offer fiscal incentives,
    such as reduced or prolonged payment of ICMS taxes, as early
    as 1991; at the time, Bahia was one of the few states that
    could afford to engage in this so-called "fiscal warfare."
    The Pro-Bahia program, combined with Bahia's proximity to
    the southeast consumers, helped to attract various
    investments throughout the 1990's.  Over the last few years,
    the program has progressed from a generic incentive program
    to a targeted sectorally based program, and was used to
    differing levels of success in developing an informatics
    pole in Ilheus and an automotive sector in Camacari.

    ¶5.  The State currently has a plan called Bahia 2020, which
    is a statewide program for meeting certain Human Development
    Index goals.  Another key plan for the State's economic
    development is "the State Plan for Transport Logistics,"
    which is based on a study on the flow of goods throughout
    the state and is meant to be a basis on which state economic
    authorities can rationalize scarce resources to better
    target infrastructure projects that will benefit the State
    most.  The idea is that the private sector would most
    readily partner with the State in these priority areas, with
    or without public-private sector partnerships (PPPs); Bahia
    also has approved a law regulating PPPs.

    Ford Plant Was Worth Every Penny...
    -----------------------------------

    ¶6.  The most obvious example of the success of Bahia's
    incentive programs is the location of the Ford plant in
    Camacari, Bahia, after negotiations broke down with the
    state of Rio Grande do Sul and then Governor Olivio Dutra.
    Most interlocutors in Bahia told econoff that the financial
    sacrifice that Bahia made to attract the Ford plant was well
    worth it for the positive impact on the State's image alone,
    which should allow the State to attract future investments
    at a much lower cost.  In addition, the USD 1.9 billion
    operation, which opened in Camacari in October 2001, has had
    a considerable socioeconomic impact on the surrounding area,
    exceeding initial expectations and creating 7,000 direct
    jobs and 70,000 indirect jobs.  (Reftel)  The State also
    received a Ford Design Center as a result of contractual
    commitment for engineering services, bringing 400 engineers
    from Sao Paulo and abroad.  (Note:  This is Ford's only
    design center in Latin America; there are only four others
    in the world.)

    ¶7.  However, Bahia did "spend" a lot to attract the Ford
    plant to Bahia, including conceding Ford a state-constructed
    private port for 20 years, leveling the land, guaranteed
    interest rate stability, some direct financing and tax
    deferments, in addition to several public works required by
    Ford for a minimum quality of life for its workers.  The
    burden got to be too much with the unforeseen spike in
    interest rates in 2002 and 2003 and Bahia was forced to
    "renegotiate" with Ford in 2003, essentially doing a bit of
    number juggling and adjusting the payment calendar, which
    allowed the State to evade mandatory spending and transfers
    to municipalities with the stroke of a pen.

    New Investments on Horizon
    --------------------------

    ¶8.  Indeed, Bahia's "business friendly" attitude seems to be
    paying off in other areas, with several new investments
    coming on-line in 2006.  A newly announced Bridgestone tire
    plant, which represents an initial investment of USD 270
    million, should come online in 2006; a cellulose investment
    in southern Bahia by Veracel in conjunction with a Swedish
    company also is expected to come online the same year.
    Additionally - to the annoyance of Rio state authorities -
    Bahia will get a brand new shipyard 300-400 km south of
    Salvador courtesy of the Bahian construction company
    Odebrecht, which has won several contracts for the
    construction of deep-water production platforms for
    Petrobras.

    ¶9.  That said, Menezes confided that he thinks that the
    State still lacks a deliberate articulation of its
    priorities.  Jobs are a high priority for the State, yet
    many of the large companies installed in Bahia do not create
    a lot of local jobs; the State's principal industries
    contribute 40% of the GDP but only 17% of the jobs in the
    market.  Menezes thinks the State needs to focus on the
    creation of local Small and Medium Enterprises (SMEs) around
    these "anchors" to employ more Bahians, adding that Salvador
    has the highest unemployment (15.8%) of Brazil's six
    principal metropolitan areas, according to the IBGE.

    Despite Focus, Tourism Still in Initial Stages
    --------------------------------------------- -

    ¶10.  State and city authorities alike also are focusing hard
    on the potential economic impact of increased tourism,
    despite the fact that it still represents a relatively small
    part of the state's economy -- estimated at 4%-8% of the
    State's GDP.  (Comment:  Menezes estimates the real number
    is closer to 4% and blames the lack of English speakers and
    qualified workers for the industry, as well as a lack of
    advertising.  End Comment.)  That said, tourism is
    definitely on the rise; spending by tourists was up 10% year-
    over-year in the first 9 months of 2004 and there has been a
    significant increase in the number of tourists traveling to
    Bahia in the last 6-8 years.  A number of joint ventures
    between local and international hotels have raised the
    overall quality level of lodging available; Menezes also
    sees this as positive because he opines that Bahia will get
    more attention from tourists as part of the information
    channels of big hotel chains.

    ¶11.  State authorities recently decided that the State
    tourism agency was too focused on Carnival, to the detriment
    of general tourism, and are refocusing efforts to attract
    tourists all year round.  Authorities also are focusing on
    the Unites States' African-American community as a target;
    Bahia has one of the most vibrant Afro-derived cultures in
    the world and has a multimillion-dollar marketing campaign
    aimed at African-Americans who want to get closer to their
    African roots but may find Africa too distant, expensive or
    dangerous.  Bahia's state tourism agency estimates that 60%
    of the 45,000 Americans who visited the region in 2002 were
    African-American.

    Atkins

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